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Suppose that the PF credit is n-points under the atm straddle math. I solve for a PF delta that will equate to atm straddle math equivalence. For example:
ES 1100
ES 1100 straddle 60 (90)
ES 1040 1x2 PF 82
I'll solve for the $400 per contract under on the PF credit and choose a strike that results in something approaching 20-deltas short. Obviously there is convexity, so this is a generalization.
Trademark ... I only trade 1x2 PF on Index Options ..... James
thanks guys, I think I got it this time
I have been modelling and backtesting PF , and I need a clarification on a certain issue: I cannot get b/e outcome on a strike-touch on the upside, only works on the downside strike-touch. I always get the upper strike too close to the spot (3-5%), market gets there quite quickly (in the majority of 2009), and when it does, the PF is underwater. Am I calculating the upper strike erroneously (P strike + cr from PF)?
help much appreciated
I have been modelling and backtesting PF , and I need a clarification on a certain issue: I cannot get b/e outcome on a strike-touch on the upside, only works on the downside strike-touch. I always get the upper strike too close to the spot (3-5%), market gets there quite quickly (in the majority of 2009), and when it does, the PF is underwater. Am I calculating the upper strike erroneously (P strike + cr from PF)?
help much appreciated
I am confused here, are you talking about up-strike PFs? SPX at 1100 and PF strike >1100?
OK, from your confusion I see my stupid mistake. I was referring to the same PFs you guys were discussing. I assumed that when you say "b/e outcome on a strike-touch" you didn't refer only to the lower strike (the PF strike) , but also to a calculated one on the upside, to pre-define the bail out if the underlying shoots up (being in a short-delta bet). Knowing your attitude (adjustments are death) , I figured PF dealt with the upside risk in advance (besides risk being merely capped by size).
OK, from your confusion I see my stupid mistake. I was referring to the same PFs you guys were discussing. I assumed that when you say "b/e outcome on a strike-touch" you didn't refer only to the lower strike (the PF strike) , but also to a calculated one on the upside, to pre-define the bail out if the underlying shoots up (being in a short-delta bet). Knowing your attitude (adjustments are death) , I figured PF dealt with the upside risk in advance (besides risk being merely capped by size).
I haven't modeled one in awhile, but the ones that model well are usually fairly symmetrical/neutral. Normally, I am not too concerned with upside B/E as it's the un-leveraged outcome.
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